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4 ways to profit from the growth of the Internet

Although Australia only represents around 2% of the global market for listed equities, the local boards are home to some very strong businesses. Australia has developed a particular strength in “marketplace” style stocks that facilitate a connection between a buyer and seller of goods or services.

This online marketplace approach was pioneered by US giants like Amazon and eBay, but our local enterprises have applied the compelling logic of marketplace economics to many other industries.

The best online marketplaces are attractive because they are scalable, and require little additional investment to generate market-leading returns on equity.

So which is the best on this list?

The newcomers

Redbubble Limited (ASX: RBL) is the newest internet stock on the ASX, having debuted strongly at the start of this week to close 9% higher on its first day of trade.

Redbubble is a customer facing website that attracts artists and designers. These creative types get the option to market their work to a global audience of consumers, while consumers are drawn to the site for the unique, original work that can be purchased.

Artwork and designs can be applied to products as diverse as phone cases, t-shirts, stationery and a wide range of homewares. Redbubble earns revenue by setting a base price for every kind of product, which covers its costs, while allowing the artist the freedom to choose the margin they would like to earn on top of that base price.

Freelancer Ltd (ASX: FLN) is also relatively new to the ASX, having been listed for less than three years. However, the share price is within a whisker of where it was on its very strong debut.

Freelancer is a marketplace for jobs, with tasks as simple as audio transcription and data entry to as complex as app coding and back-end website development.

Freelancer is leveraged to some powerful secular trends, including increased internet penetration in the developing world, the trend towards outsourcing functions by businesses of all sizes and increased globalisation.

The established players

Carsales.com Ltd (ASX: CAR) is a far more “mainstream” marketplace, with the domestic carsales.com.au the highest ranked car selling website in Australia.

The company is expanding in Australia by trying to “own” more of the revenue of the car buying and selling lifecyle through stakes in car financing company Stratton Finance and the ownership of tyre purchasing website tyresales.com.au.

It is also replicating its core car selling business in targeted countries in South America and Asia.

REA Group Limited (ASX: REA) is similarly well known, with a dominant domestic portal. Like Carsales, REA group is also expanding laterally in Australia, most recently through its purchase of accommodation sharing website flatmates.com.au.

Its lesser known operations include the nascent south-east Asian property portals previously operated by iProperty Group, as well as a stake in the second-largest property portal in the United States, realtor.com.

Foolish takeaway

Of the four stocks on this list, REA Group is the most profitable, but also arguably the most exposed to headwinds, because of the potential slowing of the Australian property market.

Redbubble is an interesting stock, but will struggle to expand beyond its niche, and the struggles of its peer, Etsy, should serve as a warning.

Freelancer will likely be a billion dollar business, but is not yet dominant in its niche, is unprofitable and is exposed to global competition.

Carsales has a dominant domestic brand, is expanding laterally in its most lucrative market and is picking and choosing its battles overseas. For those reasons, it appears to be the best marketplace stock on this list.

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Motley Fool contributor Ry Padarath owns shares of carsales.com Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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